Writings on Politics, Economics and History

The perils of privatizing public goods

In September 1987, nearly a year before Tracy Chapman sang about revolution, President Ronald Reagan started one in American policy—he started privatizing America’s public goods. The revolution didn’t happen overnight. In fact, most people didn’t even realize it occurred. As these two fantastic articles reveal, nearly thirty years later we’re dealing with the damaging consequences—economically, ethically, and mortally. Privatizing public goods can threaten nearly every aspect of our society.

What is privatization?

In its simplest terms, privatization is when a government sells off a traditionally publicly owned and operated asset (water, energy, operations accounting). It’s about trimming the public fat. The idea can primarily be traced to London, where Prime Minister Margret Thatcher aggressively privatized a variety of state owned assets, including: oil, telecom, and automobiles. Proponents argued that putting the assets in private hands would force managers to boost efficiency and service quality. After all, they would have to cut costs to please shareholders and increase services to attract customers. It was also an easy political victory. With a simple auction, they could reduce short term spending overnight. By the end of the decade almost $185 billion of public assets were sold to private investors.

Some of this privatization was undoubtedly needed–there isn’t a true valid argument for state ownership of a car company, or a consumer goods factory. But as the Harvard Business Review pointed out, in America, there wasn’t much to privatize. “Unlike other industrialized countries where many of the utilities and basic industries are state-owned—and thus ripe targets for privatization,” John Goodman and Gary Loveman wrote shortly after the trend hit America. “In the United States, the telecommunications, railroad, electrical power generation and transmission, gas distribution, oil, coal, and steel industries are entirely or almost entirely privately owned.”

Since there wasn’t much fat to trim, and politicians are always looking for easy political victories, American politicians took it a step further. They set their sights on public goods.

What are public goods?

In economic speak, “a public good is a product that one individual can consumer without reducing its availability to another individual, and from which no one is excluded.” In plain English, it is something that benefits the whole of society, but impossible to ration. Public parks, police, EMS and fire, jails, and national defense are all examples. Most people would agree that they benefit society and are needed, but nearly impossible to pay for or limit their use by non-payers. E.g., if someone could refuse to pay for defense spending, how would you restrict the benefits of a standing army?

Two fantastic articles were recently published that detailed the results of decades of public good privatization.

“My four months as a private prison guard” – Mother Jones

Corrections Corporation of America (CCA) is an American company that manages a collection of for-profit prisons and detention centers. Proponents say that they reduce public cost and delivers a similar quality of good. After readingShane Bauer’s expertly reported expose, it’s hard to believe that the company isn’t a plague on American society. Every single incentive in the contract is angled for CCA to increase their profits by reducing service to the point of in-humane treatment. That means reducing staff, reducing training, reducing, and reducing the quality of the prison. It’s a company built on exploiting the prison population for their own personal enrichment. They even have a vacancy requirement built into the contract. During Bauer’s four months working for the company he saw:

Cost cutting to the point of flagrant violations of the legal living conditions established by the state

The prison locked down due to lack of staff

Inmates denied education, work programs, and exercise due to lack of staff

Inmates imprisoned post-sentence because CCA earned more money with them inside ($34 a day per head)

An inmate receiving an additional 30 days in jail (and CCA an additional $1,000) because he removed a broom from a closet at the wrong time—an Officer gave him the okay

Substantial circumstantial evidence that CCA made informal agreements with gangs to “police” prisons and reduce their staffing cost

“People say a lot of negative things about CCA,” the head of training, Miss Blanchard,” tells Mr. Bauer early during his time there. “That we’ll hire anybody. That we are scraping the bottom of the barrel. Which is not really true, but if you come here and you breathing and you got a valid driver’s license and you willing to work, then we’re willing to hire you.”

It’s a fantastic article; a clear future Pulitzer winner.

“When You Dial 911 and Wall Street Answers” – New York Times

Ever since the 2008 financial crisis devastated the budgets of American states and cities, politicians have turned to private equity to manage their Emergency Medical Services. It’s privatization caused by necessity. In under 10 years PE firms have increased their public good holdings from $1 trillion to $4.3 trillion – more than the GDP of Germany. Private Equity is known for buying assets and slashing costs to the point of harm. In this great article, Danielle Ivory, Ben Protess and Kitty Bennett team up and trace the evolution of the trend and its dire effects on the public. Including:

Slower EMS response times for PE owned companies

Under funding to the point that EMS staff members regularly raided hospital supply closets for simple supplies

Ambulances without brakes

An astounding level of corporate bankruptcies

Privatizing public goods (a conclusion)

There are many times when privatizing a government asset is a great idea. For instance: steel, automobiles, and electronics. Each has a clear market with clear competitors. Running these like a business will create incentives to increase efficiencies while improving the features. You can’t say the same about jails or emergency medical services. There isn’t a viable private option of either. Most people don’t want to live in a world where firetrucks force you to pay before they put out a fire. Most people don’t want to live in a world where a corporation can imprison you. But that’s the world we’ve started to create.

Private corporations should augment public goods, but well functioning jails and emergency medical services are a requirement for an advanced civil society. It’s clear that complete privatization can’t deliver that.